Most favoured nation clause: Why revising differential pricing may be wiser than importing global prices

As U.S. policymakers continue their search for cost-containment solutions in prescription drugs, the resurrection of the Most Favored Nation (MFN) Executive Order marks one of the significant deviations from free market policies of the past. Originally introduced in 2020 and reactivated in 2025, the MFN clause directs CMS to pay no more for certain drugs than the lowest price paid by other developed nations. This continues to be in a state of uncertainty, at best.

On the surface, the logic seems sound: Why should American taxpayers subsidize the cost of drugs for countries paying far less? The answer, like most things in pharmaceutical pricing, is both more complicated and more consequential than it appears.

How HHS justifies the MFN model: Per capita GDP as the equalizer

The Department of Health and Human Services (HHS), in its implementation documents, bases the MFN benchmarking process on per capita GDP-adjusted prices. This isn't just technical nuance, it’s a foundational economic choice that carries significant ideological baggage in the context of drug pricing. By normalizing prices through per capita GDP, rather than total GDP or market-scale economics, HHS assumes that individuals in different countries should bear similar price burdens for therapies, regardless of the overall structure, funding, or demographics of their national healthcare systems.

This approach ignores the fundamental difference between a country's average individual income and its collective capacity to finance healthcare through broad-based systems. Per capita GDP masks internal inequalities and removes scale economies from the equation. By comparison, aggregate GDP, although imperfect, at least acknowledges a nation’s total economic heft and capacity to invest in healthcare.

Even more troubling is the ideological import: per capita GDP benchmarking imports price controls made by other nations, many of which run single-payer systems where drug pricing decisions are informed as much by politics and industrial policy as by health economics. By tying U.S. prices to these benchmarks, MFN undermines American pricing sovereignty. It substitutes value judgments made in Ottawa, Berlin, or Seoul for those that ought to be made in Washington, Cleveland, or Peoria.

In short, the MFN clause is not a recalibration, it is a wholesale importation of foreign pricing policy, wrapped in economic disguise. And it does so without importing those nations' values, goals, or trade-offs. It’s not market reform, it’s market replacement.

Differential pricing: A smarter approach, until it isn’t

Differential pricing is a strategic mindset. The idea is simple: set prices in a way that reflects the economic capacity and healthcare context of each market. In other words, price according to the value the therapy delivers and the system’s ability to pay, a differential pricing strategy that many pharmaceutical companies apply globally.

Pharmaceutical companies use differential pricing strategies to:

• Support equitable access by offering lower prices in emerging markets.
• Preserve innovation incentives by maintaining pricing corridors in high-income countries.
• Adapt to local regulatory frameworks, health technology assessments (HTAs), and reimbursement delays.

It’s rational. It’s defendable. And in most cases, it is good for the world as an efficient method of spreading health technology advances that improve the lives and productivity of emerging economies.

But differential pricing has limits and this paper does not attempt in any way to refute that. The underlying assumption that the US (and others), pay more for therapies than other nations; however, when the price differences become extreme, when one country or countries pay significantly, i.e. 50 to 70 percent, more, than what another country pays for the same product, it begins to fracture the logic of global solidarity. That's when policymakers, understandably, start looking for mechanisms like the MFN clause.

MFN: Importing foreign health decisions, abandoning market logic

At its core, the MFN model does something no other U.S. healthcare pricing initiative has done before, it delegates our drug pricing authority to other nations. It ties U.S. payment levels not to the U.S. value system, market-based outcomes, or negotiated trade-offs, but to decisions made by bureaucracies in entirely different economic and political contexts.

This represents a sharp break from free-market logic. Differential pricing, for all its strategic segmentation, operates within the bounds of market forces, adjusting to competition, patient value, and local demand elasticity. MFN, in contrast, locks U.S. prices into health policy frameworks born in other nations’ parliaments, not our own marketplace.

We don’t let foreign regulators dictate our spending on the latest fighter jet or the cost of eggs, yet we’re now letting them shape the economics of U.S. drug reimbursement by adopting their decisions. That’s not just risky, it is structurally incoherent. For a system that depends on innovation, competition, and adaptive pricing strategies, importing rigid price controls from foreign governments is a poor substitute for reform.

MFN, broader cost drivers, and policy implications

Where does this MFN policy begin and end. If it begins with pharmaceutical pricing, which by most measures account for a small minority of U.S. healthcare expenditures, does it end with the U.S. also adopting the prices and costs of other healthcare affiliated expenses? For instance, U.S. healthcare professionals earn significantly more than their counterparts abroad. According to OECD data (2023), U.S. general practitioners earn 3.5 times the average wage in the country, compared to 2–2.5 times in many other developed nations. Specialists command even higher premiums. Nurses and pharmacists follow a similar pattern (OECD Health at a Glance 2023).

Hospitals and procedures are also more expensive. A routine angioplasty costs over $32,000 in the U.S., compared to $13,000 in Australia. A C-section birth in the U.S. averages nearly $15,000, compared to $7,500 in the UK (HealthSystemTracker, 2022).

Administrative expenses account for 25%–30% of U.S. healthcare spending, double or triple the share in other OECD nations driven by complex billing, fragmented payers, and regulatory burden (JAMA, 2020).

Policy implication

Implementing the MFN clause without addressing these structural drivers is not reform; it is a misdiagnosis. The model focuses on a narrow slice of health spending (outpatient drugs) while leaving untouched the higher costs embedded elsewhere. It may reduce prices but at the cost of innovation, limiting access in lower-income countries, and do little to contain overall U.S. spending with even less affecting the actual acquisition cost of the drug for patients.

Furthermore, initiatives like the Inflation Reduction Act (IRA) have already introduced powerful tools for price negotiation, inflationary caps, and rebate enforcement within Medicare. These reforms are still in early implementation. MFN, as a parallel or overlapping mechanism, risks duplication, overreach, and destabilization of the existing policy framework.

The foundational question

The ultimate question is not simply what we pay for drugs, but rather:

Is it right that the U.S. pays more for healthcare including medications, surgeries, hospitals, and professional care than other nations? And how much?  Our major strategy for controlling prices in a market, including healthcare, has been and is capitalistic competition. Why are we implementing the exact opposite?

Until policymakers engage directly with those questions, policies like the MFN clause are ideologically shallow and economically misaligned. Differential pricing, applied with moderation, remains a globally accepted, innovation-preserving tool. Rushing toward international price linkage without understanding our system's exceptionalism is analytically contrary and morally premature.

Final notes

The MFN approach ignores several facts. 

• First, third parties i.e. commercial payers currently negotiate discounts on behalf of CMS underneath the Medicare Modernization Act mandates. 
• Second, the Inflation Reduction Act has increased CMS ability to negotiate directly.
• Third, biopharmaceuticals have significant value to the health of our nation and have contributed over a third of the life expectancy gains of the last 30+years.
• Fourth and perhaps most importantly, it ignores the real question around drug pricing – Will patients benefit in savings?

A holistic and patient-focused approach to healthcare reform is essential. Drug pricing must be addressed in context, not isolation. Without broad structural consideration, the MFN clause threatens to reduce global access, impair innovation, and miss the mark on its intended savings, especially for patients at the point of sale. 

References

1. Centers for Medicare & Medicaid Services (2020). *Most Favored Nation Model Interim Final Rule with Comment Period*. 85 FR 76180.
2. Kolassa, E.M. “Value-Based Pricing: Beyond the Buzzword.” PM360.
3. Towse, A. & Barnsley, P. (2013). “Approaches to Differential Pricing in Global Drug Markets.” Health Economics, Policy and Law, 8(3), 315–332.
4. White House (2025). *Executive Order on Most-Favored-Nation Pricing*. https://www.whitehouse.gov/presidential-actions/2025/05/delivering-most-favored-nation-prescription-drug-pricing-to-american-patients
5. OECD Health at a Glance (2023). *Remuneration of Doctors*.
6. Peterson-KFF Health System Tracker (2022). *How do healthcare prices and use in the U.S. compare to other countries?*
7. Himmelstein et al. (2020). *Administrative Costs in the U.S. Healthcare System*. JAMA.
8. Buxbaum, J. D., Chernew, M. E., Fendrick, A. M., & Cutler, D. M. (2020). Contributions of Public Health, Pharmaceuticals, and Other Medical Care to US Life Expectancy Changes, 1990–2015. Health Affairs, 39(9), 1546–1556.